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January 3, 2000

January 3, 2000

1999 has ended and the new millennium awaits us. As we all know 1999 was a very interesting year. The U.S. economy continued its big growth completing eight years of economic expansion. Europe began to grow faster. Asia came out of its decline to register growth in the second half of 1999. Y2K fears were unable to hobble economic growth and most observers believe that the U.S. and most of Europe have been Y2K compliant for some time. Thus far in 2000, Y2K problems have been very small and easily corrected. Even the optimists have been surprised by how little has gone wrong.

For the new year, we see three major trends, two continuing and one developing. The continuing trends are:

TREND #1

Continued disparity in the U.S. market. Members of the so called “new economy” that is, high tech areas, such as telecommunications equipment, internet servers, switches, data storage equipment, software industries, pharmaceuticals and bio-tech will prosper. Old economy companies, many of which are grossly undervalued, may continue to be ignored. Some industries with characteristics of both old and new economy, like retailing and consumer services, may also do well in 2000.

Another major catalyst to a continuing stock market rally is all of the money that was set aside in cash by those fearing Y2K problems. If no major problems develop in the U.S. and Europe, we can be assured of massive money inflows into the market in January. In fact, I believe this money could exceed $100 billion. This could lead to a very strong rally in the market leaders in early January.

TREND #2

Japanese political, economic and social restructuring will continue and accelerate. The Japanese government has provided massive liquidity to the economy and made tax changes to incentivize capital formation and decrease wasteful spending. Major companies have abandoned the tradition of lifetime employment and promotion by

seniority. Merit promotions, pay based on performance, removal of redundant positions and many other changes are taking hold in Japanese businesses. The Japanese have been slow to adapt, but now they have seen the future, and they will move aggressively to achieve success in manufacturing equipment and components and providing services for the internet age.

Big Japanese companies continue to restructure and this restructuring is leading to a decline in the importance of basic industries (steel, transportation, energy) and an acceleration in the Japanese focus on consumer technology and high technology industries, especially video games, telecommunications equipment, semiconductor chips for telecommunications and computer applications, and associated technologies.

TREND #3

Europe is awakening and focusing on the need for more technology development. European governments are belatedly moving to create the political changes to bring better labor rules and more cost cutting. The recent weakness of the “Euro” currency has sent a message to European politicians that the economic well-being of their constituents is highly correlated with responsible pro-growth business friendly economic policies. For example, Germany is considering cutting taxes on capital gains. This will create a more investment friendly Germany, draw the public into the investment markets, loosen the banking industry’s control of the economy and provide the capital necessary to create faster growth.

These three trends should support our view that for at least the first few months of 2000, we are in for a continuance of the market rise in the U.S., in Europe and in Japan.

We are focusing on fast growing stocks in U.S., Europe and Japan to capitalize on these trends. After April perhaps the public will become aware of the extreme overvaluation in some stock market sectors and the extreme undervaluation in others. Until then we will capitalize on the popular fantasies and keep a close eye on the exit as we monitor both internal market events and external global or regional social, political or economic events for any problems that can derail the market.

INFLATION

Although inflation may gradually rise throughout 2000, we expect it to stay within reasonable bounds. Major raw material prices are constrained by oversupply and a free flow of information allows businesses to seek out bargains and, thus, cut costs.

CURRENCIES

We anticipate that the U.S. dollar will maintain its value versus the yen. The Japanese government is focused on decreasing the yen’s value. The Euro, which has been very weak versus the dollar, could strengthen somewhat as Europe takes action to improve their competitive positions.

Our investment strategy is to focus on high quality companies in high technology, service, retail, biotechnology and leisure areas in the U.S. Within high technology, we like digital switches, servers, telecommunications equipment, internet software and fiber optic switches. Within leisure, we like cruise lines and video game platforms and within biotechnology, we favor companies that will create cures for serious diseases.

In the retail sector, we will focus on retailers who understand both bricks and mortar and internet marketing.

We expect to focus on high quality technology companies in Europe where a shortage of high tech companies exist. European pension funds must own 80% European companies by law. Europe has very few high tech standouts so those get a disproportionate percentage of the available investment dollars. The Europeans lead in one area of high technology, wireless communications. We are focusing on stocks in this area, companies that provide services and those that make hardware, software and components for wireless systems.

In Asia, we are focusing primarily on Japan where a nine-year bear market ended in 1999 and many great companies are very undervalued. We especially like entertainment, specialty retail, banking, consumer electronics, wireless telecommunications, semiconductors, and electronic component manufacturers.

We remain bullish about world markets in the first months of 2000. We expect Europe and Japan to continue to rise as people focus on the improving competitive attitude in Europe and the restructuring and change of management style in Japan. We expect the U.S. to continue to do well, but not as well as Europe and Japan. Your portfolios will be balanced between the three sectors. As far as currency goes, the U.S. dollar should be reasonably strong in 2000 as U.S. interest rates continue to rise. We believe the Federal Reserve will continue to raise rates throughout 2000. These rising rates may give rise to a market correction in the April-October period.

We can and will bore you with long analyses of these and other trends should you wish to call us. However, we realize that the majority of you are too busy to delve into the arcania of investment strategy, so please accept our warmest wishes for a new year filled with health, happiness and success.